Trump’s Steel Tariffs Are a Surefire Way to Hurt the Rust Belt

Rolls of wire are seen outside Johnstown Wire Technologies that produces wire and rod primarily for the transportation and construction industries,on September 8, 2016, in Johnstown, Pennsylvania.
The White House race could be decided in the Rust Belt -- a vast, decaying former industrial powerhouse in the US Midwest and Northeast where Hillary Clinton and Donald Trump are battling for the support of working class white voters.
Johnstown, a former steel capital tucked away in a valley, is symbolic of the discontent that exists among the working class towards the Democratic Party. / AFP / DOMINICK REUTER (Photo credit should read DOMINICK REUTER/AFP/Getty Images)

U.S. President Donald Trump won the election on a campaign to bring back blue-collar jobs. Yet his moves to shield the steel industry may kill some of those very jobs.

Trump is mulling tariffs on steel to stem the tide cheap imports and “put steel back into the spine of this country.”

The math doesn’t work in his favor: For every U.S. steelworker, there are about 60 workers in steel-using industries.

Imposing steel tariffs would raise the price of heavy-grade steel that is not readily available in the domestic market. Those price increases may delay or even kill some pipeline construction projects.

And tariffs would make it easier for the domestic steel industry to raise prices, which could squeeze some steel-consuming industries, like U.S. automakers and heavy equipment manufacturers, that may not be able to pass those higher costs onto consumers.

“If no one is buying the cars made with North American steel, then the car maker and the steel company is going out of business,” said Terry Sweeney, vice president of A.J. Rose Manufacturing Co. of Avon, Ohio, which makes powertrain components for car engines and transmissions.

No one disputes that a glut of cheap steel in recent years has pushed down world prices. A metric tonne of steel in London reached a historic low of $90 last March, down from a record high of $1265 in June of 2008.

Steel producers and industry experts blame China’s state-owned mills for pumping out too much steel and selling it below cost in overseas markets – a practice known as dumping. Just the increase in China’s steelmaking capacity last year was more than twice as large as the total steelmaking capacity of the United Kingdom, according to Greenpeace.

China’s overcapacity has been a challenge for the United States and the European Union, both of which have failed to get China to turn off the spigot. The United States has imposed more than 190 duties on iron and steel products coming into the U.S. market. Meanwhile, the EU has sought commitments from China to cut its capacity in negotiations.

Seeking a new way to clip China’s wings, the Trump administration dusted off a little-used trade law to launch a probe into whether cheap steel imports are threatening U.S. national security. Commerce Secretary Wilbur Ross, whose department must determine whether there is harm to national security, said the report could lead to sweeping tariffs meant to shore up the domestic industry.

The most recent such investigation by the department in 2001 found no harm to national security from certain steel and iron imports, and that less than 1% of domestic output would satisfy all national defense needs for these materials.

But the department has “very wide latitude to change the standard,” said Scott Lincicome, an international trade lawyer at the law firm White and Case LLP. “The law doesn’t establish mandatory criteria.”

Imposing steel tariffs would likelymake life a little easier for overseas manufacturers of tractors, cranes and other heavy equipment, machine tools, and steel furniture, experts said. Their cheaper raw-materials costs may allow them to undercut domestic manufacturers of those same items, who may be forced to freeze hiring or layoff workers to stay afloat.

“You’re talking about a massive amount of jobs that are going to be killed as a result of this,” said Gordon Johnson, a managing director at Axiom Capital Management Inc. who tracks the steel industry.

It’s not idle speculation: The United States has been down this road before. In 2002, President George Bush imposed tariffs of 8 percent to 30 percent on a range of steel imports. Around 200,000 Americans lost their jobs due to higher steel prices that year–more than the 187,500 people employed in the steel industry itself, according to Trade Partnership WorldWide LLC, a consultancy commissioned by a coalition of steel-consuming companies to prepare the analysis. The tariffs, which Bush removed after only 18 months, played “a leading role” in pushing up steel prices, the study found.

The blow was felt acutely in the Rust Belt, where many heavy industries are concentrated. In 2002, Ohio and Michigan were the third and fourth hardest-hit states, losing 10,553 jobs and 9,829 jobs, respectively, due to higher steel prices, the study found. Meanwhile, Pennsylvania lost 8,400 jobs, the fifth-highest of any state.

Such states were a key part of the “Rust Belt” strategy that propelled Trump to the White House. He campaigned heavily in down-and-out communities in Appalachia and the Upper Midwest with vows to revive heavy industry and unlock America’s energy reserves.

In a press briefing to announce the probe, Ross acknowledged that higher steel costs would filter down to some manufacturers, saying it would be a subject of the Commerce Department’s report and calling it “a question of balancing one’s priorities.”

But he said, “the important question is protecting our defense needs, and we will do whatever is necessary to do that.”

The steel industry, meanwhile, downplays the potential harm to manufacturers across the economy, given what it sees as a concerted commercial assault by Beijing.

“Of course I’m concerned,” said David Taylor, the president of Pennsylvania Manufacturing Association in Harrisburg. “But the fact is, steelmaking is foundational to the rest of our economy. And it’s under attack. We, the United States, need to defend this industry.”

China’s industrial overcapacity in steel is “an existential threat” to the U.S. steel industry, while steel tariffs are “an inconvenience” to steel-consuming industries, argued Scott Paul, who heads the Alliance for American Manufacturing, which represents steel companies and steelworkers.

“It’s not going to have the kind of shocking impact they would lead you to believe,” he said.

Even some manufacturers see tariffs as an imperfect but necessary step to curb a predatory Chinese trade practice. Tariffs would be “a good thing for the country in the long run,” said Clete Cunningham, the president of Weldsale LCC, which manufactures welding tables and workbenches in Philadelphia.

“It would affect my bottom line, it may slow my hiring, but eventually the business will stabilize and things should go on as long as the tariffs are not excessive,” he said.

In parts of Pennsylvania and Ohio, a tougher U.S. position on Chinese trade — even if it brings some pain — will likely be well received by Trump voters, said Terry Madonna, who heads the Center for Politics and Public Affairs at Franklin and Marshall College in Lancaster, Pa.

But he acknowledged the move could be a mixed bag for his state, where hopes for reviving the economy rest on unlocking vast reserves of shale gas and transporting it to the East Coast for export. Natural gas “has become the new industry in which we can talk about industrial production,”Madonna said.

Pipelines for carrying large volumes of gas require thicker steel that is typically imported from abroad, and steel tariffs could doom such projects, according to Dr. J. Malcolm Gray, president of the Microalloyed Steel Institute, an industry advisory firm.

The six or seven pipeline projects under way to transport natural gas to the Atlantic coast require about 2 million tons of such heavy pipe, but only about half a million tons are available domestically, Gray said. With high steel tariffs, most of these projects will fail, he predicted.

U.S. steel producers could eventually produce the heavy-grade steel, but uncertainty over trade policies may discourage them from making the investments to retool their mills. “By the time they build it, Donald Trump is gone, and it will be a free-for-all again,” Gray said.

A.J. Rose Manufacturing relies mostly on European steel to make its powertrain components because American mills, which typically make steel from scrap, produce a material that is too variable for the precision parts his company manufactures, Sweeney said. U.S. steel producers don’t want to work with the company, which has $75 million in revenue, to fabricate steel to its specifications because it’s too small, he said.

“If the foreign steel got expensive it would make us less competitive,” he said.